Cityneon's 1Q18 net profit jumped 80.5% y-o-y to S$3.95m on 38% increase in revenue to S$23.5m, with majority contribution from its IP businesses.

To own at least 9 to 10 exhibition sets by end 2018; in discussions for 3rd and 4th Jurassic World sets.

No change to earnings forecasts which assumes 10 exhibition sets each for FY18F and FY19F.

Maintain BUY with unchanged Target Price of S$1.60.

What’s New -

Results highlight

Cityneon's 1Q18 net profit jumped 80.5% y-o-y to S$3.95m, with majority contribution from its Intellectual Property (IP) businesses. The IP business is now the key contributor both on the revenue and earnings fronts.

Revenue contribution from IP business now accounts for 62% of group revenue, as compared to 44% in 1Q17. Recognition in 1Q18 includes contribution from Sweden, China, Australia, and partially from Paris.

The traditional business units remained relatively unchanged in 1Q18 compared to the same quarter last year.

In terms of earnings contribution, IP business contributed the bulk of its overall earnings in 1Q18.

Improving margins.

Gross margin for 1Q18 improved to 69.8% from 61.1% in 1Q17 while net profit margin increased to 16.8% from 12.9%.

The improving margins were mainly attributed to higher contribution from the IP business that commands higher margins vs the traditional business.

Outlook

To own at least 9 to 10 sets; in discussions for 3rd and 4th Jurassic World sets.

Cityneon highlighted that it is expected to own and commission at least 9 to 10 permanent and traveling sets, across different parts of the world by the end of 2018. It recently announced the building of the second set for Jurassic World – The Exhibition, and is also in discussions to build the third and fourth exhibition sets. The opening of the Jurassic World Fallen Kingdom in June 2018 globally and the commitment of the studios to produce another Jurassic World movie in 2021 augurs well with the group’s strategy to transform and grow.

With the latest addition of the fourth IP - Hunger Games - Cityneon now holds four major international IP licences with global major studios - Disney, Marvel, Hasbro, Universal and Lionsgate, thus putting the group firmly on the growth path.

Moving up the value chain for the traditional business.

For the traditional business, Cityneon will continue to expand its full suite of “Design & Build” services, especially for the upcoming 2020 World Expo in Dubai, to continue its success in the previous World Expos in Shanghai and Milan.

Earnings & Recommendation

No change to our earnings forecasts. We have already assumed 10 exhibition sets in total for FY18F and FY19F (five for Avengers, two each for Transformers and Jurassic World and one for The Hunger Games).

Our target price of S$1.60 is based on PE valuation peg of 14.4x, which is at a 20% discount to peers’ average PE of 18x on FY18F earnings.

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